Implications for Asset Returns in the Implied Volatility Skew
Posted: 9 Dec 2009
Date Written: December 9, 2009
We dissect the impact of information contained for future asset returns in the implied volatility skew. Future returns are linked to the discrepancy between call and put volatilities of at-the-money options and to the left side of the volatility skew, calculated as the difference between out-of-the-money and at-the-money puts. We caution against using skew-based measures for forecasting equity returns without fully parsing the skew into its most basic portions.
Keywords: Option Prices, Implied Volatility Skew, Portfolio Returns
JEL Classification: G11, G12
Suggested Citation: Suggested Citation